Part I, Chapter II

Protection to Young Industries

I.II.1

The argument for protection to young industries cannot be stated better than in the terms used long ago by a staunch adherent to the principle of tree trade, John Stuart Mill.

"The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field; and besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production, than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burden of carrying it on, until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, will sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing."*13

I.II.2

Simple as the general course of the argument is, something more is to be said concerning the form in which it has been most often urged in recent times and the tests by which to judge of success in attaining the desired result.

I.II.3

The form in which the argument most commonly appears in connection with our recent industrial development is the statement that protection ultimately lowers prices. It is admitted (grudgingly perhaps,—and sometimes questioned or even denied) that the first effect of the imposition of a duty is to raise the price of the dutiable article. But domestic competition ensues, it is said, and eventually price goes down. And when it is asked why the domestic producer, if he can bring his commodity to market after all at the lowered price, really needs a protecting duty, the answer is that he needs it at first,—during the early stages. He needs to learn; he needs time to develop the full possibilities. All this, it is obvious, is simply the young industries argument. But during the last generation our American protectionists have been chary of using that phrase. The United States is no longer a young country. Its industries are on a great scale, often on a gigantic scale. To call them "infant" invites ridicule. Hence falling prices, alleged to be due to domestic competition, and eventual benefit to consumers, are the pleas dangled before the public. Yet this is the same reasoning, merely put in other words; the question is simply whether there has been successful application of protection to nascent industries.

I.II.4

One familiar misapplication of the argument deserves attention. In the hearings before congressional committees on tariff bills during the last thirty years, there are countless statements, often fortified by more or less accurate statistics, to the effect that the price of one article or another within the country fell after the imposition of a duty on it. All such evidence is beside the point. The question is not whether domestic price falls, but whether it falls relatively to foreign price; whether eventually it comes to be as low as the latter. If both fall together, the domestic price always remaining higher than the foreign, nothing is shown in support of the young industries argument; or rather, it is shown that the facts adduced fail to support the argument. The circumstance that both sets of prices go down indicates that some other causes,—such as improvements and inventions or new resources,—have been at work to bring a reduction in price the world over. Persistence of the gap between the domestic and foreign price indicates that no special cheapening influence has been at work in the protecting country. Only if the domestic price falls to the foreign level, does the question present itself whether protection to a young industry has been successfully applied. This is so obvious to one trained in the elements of economic reasoning that an apology is almost needed for explaining it. The repeated triumphant parading of a bare fall in prices as evidence of success in the working of protection is perhaps only a part of the general shallowness of the stock presentation of the protectionist case. Yet this sort of presentation is often made by earnest and intelligent men, convinced of the goodness of their case; one more instance, among many that are sadly familiar, to show that the most elementary economic propositions are little understood, and the simplest economic reasoning needs to be stated and illustrated again and again.

I.II.5

A different question, and one not so simple, is whether there is any prospect of gain from protecting young industries in a country as fully developed as the United States has been since 1860; whether, for so robust and full grown a social body as this has become, ridicule is not a sufficient answer, whatever the terms in which the argument is stated. In that earlier formulation of the argument which won a respectful hearing from the fair-minded, stress was laid on the general conditions of the country imposing protective duties. It was a young country that was spoken of by Mill, rather than one having young industries. List's well-known plea rested on his doctrine of stages in economic evolution,—on the inevitableness of the transition from the agricultural and extractive stage to the manufacturing stage, and on the advantages of protective duties for furthering and easing this transition. He found the United States in this stage of development when he was sojourning here during the period of our early protective movement. On his return to Germany, he found his own country in a similar stage, and agitated for nurturing protection there also. The possibility of good results from protective duties under such conditions is now denied by few. But does the same possibility exist when this particular period of transition is past, when the manufacturing stage has been fairly entered, when the question no longer is whether manufacturing industries shall be established at all, but whether some particular kinds of manufactures shall be added to others already flourishing?

I.II.6

Notwithstanding early prepossessions to the contrary, I am disposed to admit that there is scope for protection to young industries even in such a later stage of development. Any period of transition and of great industrial change may present the opportunity. No doubt the obstacles to new ventures were greater during the first half of the nineteenth century than they have come to be in the modern period. The general diffusion of technical knowledge and technical training, the lessening of secrecy in trade processes which is the inevitable result of large-scale operations, the cessation of regulations like the early British prohibition of the export of machinery, the greater plenty of expert mechanics and machinists,—all these factors tend to facilitate the establishment of industries whose difficulties are no more than temporary and transitional. None the less the early stage of any new industry remains difficult. In every direction economists have come to recognize the immense force of custom and routine, even in the countries where mobility and enterprise are at the highest. Departure from the habitual paths of industry brings unexpected problems and difficulties, false starts and initial losses, often a fruitless imitation of familiar processes before new and better ones are devised. All this is made more trying when a young competitor is striving to enter the market against a producer who is established and well equipped. The obstacles in the way of promising industries, though doubtless not so great as they were a century ago, remain great. The experiences of the United States during the last fifty years, some of which will be described in the following pages, indicate that there remains in modern times at least the possibility of acquiring a self-sustaining industry by aid during the early stages.

I.II.7

The most striking cases in which success of this sort may be fairly alleged to have been secured are those of industries quite new,—not existing at all at the time when the protective duty was imposed. Where an industry is already started, or where there exist others closely related, further extension may be expected to take place, if the conditions are really favorable, without any legislative stimulus. If a silk manufacture already is established, the development of new branches of silk making is not likely to meet with the special obstacles to young industries. And if, none the less, protection has been applied, and if thereafter a self-sustaining additional branch of the manufacture has grown up, the question at once presents itself, would not the same growth have ensued in any case? and was the protection needed? Such skepticism, however, would be hardly justified if there had been no silk manufacture of any sort before the protection was applied. Precisely this outcome,—the establishment of an industry entirely new,—has appeared under our duties on silks during the last half-century. Without the duties, it is doubtful whether there would have been any silk manufacture at all. And if in course of time that manufacture proved capable of supplying the country with its products more cheaply than those imported, or at least as cheaply, the presumption would be strong that a young industry has been successfully nurtured. It remains to be examined, in the following pages, whether this latter condition has been met; but the other condition,—that an industry completely new was brought into being,—certainly is found in the case of the silk manufacture. In the case of worsteds also, there was virtually no industry at all before the civil war; it has grown up under the barrier of protection. The same thing has happened with plate glass, and with many another commodity. In such cases,—if eventual independence has been achieved,—it may be fairly said that protection was applied to an industry really young.

I.II.8

Further: the length of time to be allowed for the experiment should not be too brief. Ten years are not enough; twenty years may be reasonably extended; thirty years are not necessarily unreasonable. When writing of the earlier stages of United States tariff history, I intimated that the first sharp break, in 1810-20, from the established ways of industry, and the very first ventures in new paths, were sufficient to give the needed impetus, and that thereafter protection might have been withdrawn.*14 An opinion of this sort I should not now support. What has already been said of the tenacity of old habits and the difficulties of new enterprises justifies the contention that a generation, more or less, may elapse before it is clear whether success has been really attained.

I.II.9

Nevertheless, in the end the final test must be applied,—can the industry, after a period not unreasonably long, maintain itself unaided? The gist of the young industries argument is that the community bears an initial charge for the sake of an eventual gain. That gain is secured only if the community is finally supplied with its goods as cheaply as the displaced foreigner could supply it. The young industry must mature so fully as to sustain itself. The final test would seem to be indifference to the continuance of the duty and willingness to meet foreign competition on even terms. If the industry continues to need protection indefinitely, and never succeeds in offering its products as cheaply as they could be got by importation, then its protection cannot be defended on this plea. There may be good pleas on political or social or military grounds; or the stock arguments about home labor and home markets and the "acquisition" of valuable industries may be repeated; but there can be no pretense that a young industry has been nurtured with success.

I.II.10

It happens, however, that there is always the most violent opposition to the application of this, the sole decisive test. In the same breath we are told that prices have been brought down and a flourishing industry has been brought to maturity,—and also that the duties must by no means be touched. It might seem reasonable to infer from this invariable unwillingness to submit to the real test that real success was never attained,—that the talk about domestic progress and lowered prices was empty froth. And yet, with all the obvious inconsistency on the part of the protectionists, it can be fairly argued that their case is not necessarily vitiated. The persistent clinging to the accustomed props, even though these were never designed to be permanent, is often due to mere ignorance or nervousness. Most business men know singularly little beyond the range of their daily routine. When customs duties have kept foreign competitors out of the market for twenty or thirty years; when a trade has habituated itself to domestic supply only; when there is a great din about pauper labor, designing foreigners, ruinous flooding of the market and what not,—there will be opposition to the removal of duties, even though in fact the removal would make no difference. All business men, and all workmen likewise, are uneasy about intruders. They prefer to be on the safe side, and to avoid the slightest chance of having to face competition from new quarters. It will often happen, too, that some special phase of an industry will in fact be damaged by foreign competition, even though the industries as a whole be independent of it. Then there will be as much overt opposition to a reduction or removal of duties as if the whole were at stake.*15

I.II.11

Under these circumstances it will not be easy for the searcher after truth to interpret the situation rightly and to reach a just conclusion. The facts which he will be able to make sure of, after examining an episode in our tariff history, will often be something like the following. Duties have been imposed that proved prohibitory, and imports have ceased; the simplest test of the working of the duties,—continuance of imports,—is thus not applicable. A domestic industry has grown up and has assumed a character of its own, very probably turning out commodities of grades and qualities different from the foreign. The domestic goods have been cheapened; but so have the foreign. Direct competition has long ceased; the two sets of competitors have gone their diverging ways, each indifferent to the other. The American producers allege that they have achieved all sorts of wonderful things, and the evidence may be strong that in fact improvements have been made by them. Their contentions rest, though without their saying it or even being aware of it, on the young industries argument. But they protest vociferously against the slightest reduction of duties, asserting in the same breath that they have distanced the foreigner and that they are in mortal fear of him. Much of their talk is obviously exaggerated. Experts who are competent to compare domestic wares and prices with foreign are not easy to find, and when found are not always unbiased. How has the experiment of protection to young industries really worked? The test of abolishing the duties has not been applied; under the political conditions, very probably it is out of the question that it should be applied. To reach a clear and certain conclusion is impossible. The best that can be done, after interpreting the evidence in the most judicial spirit, is to arrive at some qualified or provisional verdict.

I.II.12

Not infrequently those protectionists who put forward, more or less consciously, the young industries argument, contend that even after the stage of independence is reached a duty should be retained in order to prevent occasional disastrous importation.*16 It is said that even though the domestic industry can supply the market as cheaply as it could be supplied by importation and need not fear competition in ordinary times, protection is still called for because in times of depression abroad the foreigner pours in goods regardless of cost, and subjects the domestic industry to an unfair competition. This is not the demand for support against dumping in the strict sense,—that is, the systematic and continuous disposal of goods at less than cost or less than the normal price; it rests on a fear of spasmodic importations resulting from "overproduction" and the slaughtering of prices. Yet it would seem that precisely this same sort of disastrous competition must be faced at home also. Trade cycles and recurring periods of depression are peculiar to no one country. Overproduction may take place within the country; every industry must face this possibility, and be prepared to take the lean as well as the fat. The special fear of the price-cutting foreigner doubtless reflects a protectionist feeling which goes far beyond the limits of the young industries argument,—a feeling of suspicion and dislike against foreign supply at any time and under any conditions. The truth would seem to be that the consequences of overproduction,—that is, of miscalculations, mistakes, unforeseen changes in demand,—are less likely to be severe in proportion as the sources of supply are larger and the markets which they reach are wider. An international market is less exposed to fluctuations than a narrower domestic one. What is obviously true of such commodities as wheat, wool, sugar,—that their price fluctuations are less the larger the area over which the general market extends,—presumably holds of manufactured goods also. Considerations of this sort cannot be expected to appeal to the root-and-branch protectionist, for whom the young industries is only one among many arguments, and perhaps not a vital one. Those who have no general terrors about foreign supplies, and are unwilling that the young industries argument in favor of home supply should be pushed beyond its strict limits, will consider the talk about foreign overproduction as mere subterfuge, as a retirement to an entirely different and weaker line of defense after the first and strong line has been given up.

I.II.13

There remains at the very end a most troublesome question. That question remains even if it be proved, either by the conclusive test of abolished duties or by other evidence, that the protected industry has finally succeeded in offering the commodity as cheaply as it could be supplied by the foreigner. Would not this same result have come in any event, protection or no protection? Do not other causes, perhaps changes in the general industrial conditions of the country, explain the growth of the particular industry? To answer this question, a careful examination of the history of all the circumstances is necessary, and a reasonable interpretation of the course of events. And here again the best that can be done is often to reach a qualified and hesitating conclusion. But the presumption, at this stage of the debate, may be said to be against the staunch free trader. If indeed the industry has failed to meet its obligations, so to speak; if it clings to protection indefinitely and refuses ever to meet the foreigner on even terms,—then the presumption is the other way; it is against the advocate of protection to the young industry. But if the industry does accept the challenge, or is clearly able to do so without danger of defeat, then the free trader who maintains that all the protection was unnecessary, and that the same development would have taken place in any case, is fairly called on to show just how and why it would have taken place. He can no longer rest his case on general reasoning. He must consider and explain the actual course of events.

I.II.14

Enough has been said to show that this phase of economic inquiry demands in especial degree investigation of the concrete facts. Most of the economists' reasoning about international trade is deductive. The advantages of the geographical division of labor; the relation of imports to exports, and the flow of specie from country to country; the equilibrium of international payments; the doctrine of comparative costs (presently to be considered in some detail); the nature of the gain from international trade; the fallaciousness of the vulgar arguments for protection, all this rests mainly on reasoning from general principles. There may be illustration and verification from the facts, and indeed such can be found in abundance; but the core of the reasoning is not statistical or historical or realistic. This holds good also of the very first stage in the reasoning about protection to young industries. When it is laid down that protection in its first stage involves a burden to consumers, and a loss to the community because of a diversion of labor and capital into channels less advantageous, the proposition rests on no specific evidence. The ordinary protectionist would deny it at once; he would not admit that there is any initial loss at all; he would talk about the intrinsic and immediate benefits from acquiring a new industry, about increased demand for labor, about the home market, and so on. The only way to deal with him is to go back to first principles, and alas! to repeat the most elementary analysis. But after passing the elementary stage, and securing (if we can) an admission that the question in this case is whether an initial loss is balanced by an ultimate gain, we can no longer reason in the same general way. Is it probable, or is it not, that eventually the gain will come? Is domestic progress likely to be quickened? Are the conditions in the protecting country really favorable? These are not questions to be answered through deductive reasoning in terms of yes or no; they are to be answered, if at all, through laborious research and in terms of probabilities.

I.II.15

It has often been contended by free traders that the effect of protection is to retard progress, not to promote it. Foreign competition we have been told, quickens the domestic producer. In its absence he is likely to stagnate. Only by opening the field to every rival, whether within the country or without, can we secure the most rapid spread of improvements. On the other hand, the young industries advocates say that the planting of an industry in a new country, under novel conditions, pulls it out of its routine and stimulates improvement. General reasoning might perhaps incline us to the former view. A priori the most effective way of promoting progress would seem to be to make the way free and open for the best producer, wherever he may be. But then we are reminded of the difficulties of new ventures, and so on; and our attention is called to the analogy of the patent system. The analogy is not perfect, since the protection of a patent is not granted until the applicant has proved in advance that he really has evolved something new. To make the case of protection to young industries strictly analogous, one would have to require from the applicant proof in advance, not after the event, that he really had planned distinct improvements. None the less, the analogy suggests that an initial privilege to a producer, and a consequent initial burden on the consumer, may be balanced by ultimate gain. The question becomes one of probabilities, not of reasoning straight from premise to conclusion.

I.II.16

Illustrations of either consequence,—of the retardation of improvement as well as of its acceleration,—have been adduced from industrial history. The protective system of France before 1860, which was carried for many articles to the point of complete prohibition of imports, is said to have caused some staple manufactures in France to lag behind the English.*17 The protective system in Germany is said, on the other hand, to have caused one of the staple manufactures—that of iron—to progress.*18 It is certain that since the adoption of the protective system by the German Empire in 1879 there has been an extraordinary advance in all the technique and organization of manufacturing industry. In the United States it has been declared that protection of the woolen manufacture after the civil war caused old plants and antiquated machinery to be retained.*19 Yet in general it is as certain in the case of the United States as in that of Germany that the march of technical improvement has been extraordinarily rapid during the period of the maintenance of a high protective system. What may be the cause of this progress,—what part protection has played,—is doubtless a problem extremely difficult of solution; but at least it calls for careful inquiry into the particular cases. All the general indications from the economic history of the United States are that protective duties in the great majority of cases have not served to bolster up antiquated establishments or to retard improvements; though it may not be so clear that they have so often actually stimulated improvement in the way and to the extent contemplated by the young industries argument. At all events one of the chief objects of the following pages is to consider with care the history of some important protected industries, and reach such conclusion as can be derived by the only method applicable to this sort of economic inquiry,—by direct investigation of the particular cases.

Notes for this chapter

Thus, in 1912, there was opposition to a proposed reduction in duty on sewing machines, even though they had long been exported in great quantities; because some special kinds might still be imported from Germany. The same opposition, under similar conditions, was made to proposed reductions on saws, machine tools, electrical machinery,—all of them articles of which there could be at most sporadic importations. See Hearings before the Senate Finance Committee, 1912, on Metal Duties, pp. 172, 342, 1143, 1151.

End of Notes

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.